8 SUMMARY
8.1 The discussion presented in Sections 1 though 6 allows us to map out our thoughts on the challenges and risks faced by Scottish credit unions and, where appropriate, how these challenges and risks can be addressed.
8.2 A credit union is a self-help financial organisation geared to attaining the economic and social goals of members. In GB the movement is refocusing upon the financial inclusion goals of government and has been encouraged to do so through significant levels of financial support. This is not without risks for credit unions. Financial assistance weakens the self-help principle on which credit unions are based and in the future Government priorities will change putting into question further financial assistance. When this occurs many credit unions may be over-extended (staffing and premises) and may not have the necessary self-reliance mechanisms in place and this will present many small and medium sized credit unions with organisational and operational difficulties. Therefore it is important that those credit unions dependent on financial assistance now have 'believable' self-sufficiency plans in place.
8.3 The failure of credit cooperatives in Ireland in the early 20 th century was because they never attracted the more prosperous locals to provide monitoring and expertise. While such roles may not be as important today with on-line credit assessment services it is still important that credit unions have a diversified membership base. At a basic level this is because those on low-incomes are net borrowers while better off members, or those that are retired, are net savers. Without such balance survival for a credit union becomes problematic. Emphasis on the financial inclusion role of credit unions and the increasing perception of credit unions in GB as the poor man's bank does nothing to encourage membership balance. Individual credit unions, their trade associations and Government should strive to get the message across that if credit unions are good for one segment of the population they are good for all segment of the population.
8.4 Raising the loan rate to 2% per month is also likely to discourage credit union membership by high net worth borrowing members. Although credit unions are not obliged to charge this rate (except those participating in the second phase of the DWP scheme) our worry is that it may create an adverse selection problem. Those members willing to borrow at 2% per month will be those most likely to default. In a market suffering from adverse selection what results is good borrowers and savers withdrawing, and the market tending toward equilibrium where only high risk borrowers remain. We note that in GB rising levels of bad debt is a problem for credit unions. This is a problem which must be 'nipped in the bud' as rising bad debt will eventually cause credit union failures which will exacerbate the marginalization of credit unions.
8.5 Theory reveals member benefits to be maximised within a neutral credit union (one which balances the return to savings members and charges to borrowing members). In GB many credit unions provide no dividend or a minimal dividend. These credit unions are biased towards borrowers and do not maximise the benefits to members. Can this problem be addressed by enabling credit unions to offer fixed interest savings products?
8.6 Common bond extensions have increased scope for credit unions to merge, to seek scale economies and to diversify their membership mix. Availability of on line credit assessment checks reduces the importance of tight common bonds and extended common bonds are to be welcomed. While mergers have occurred and membership is increasing there is little evidence as yet of economies of scale (analysis of Scottish credit unions did not reveal any relationship between cost-to-income and size and it was also noted that over the 2003 to 2007 period loans per member declined in real terms). Our view, however, is that the merger process can be expected to continue and that as credit unions become larger a better service to members can be provided. Mergers should therefore be encouraged, and their effects on financial performance and service provision closely monitored.
8.7 Technology particular to product provision is crucial to further credit union expansion. At the individual credit union level the introduction of bespoke systems is a non-starter given cost and the scale required to profitably exploit the technology. Success can however be achieved through a centralised approach as for example that being undertaken by ABCUL with the help of the cooperative bank to provide transaction account services to a pilot scheme of nine credit unions. This is a key initiative and our view is that this initiative is the one significant hope for GB credit unions. Success can transform the movement, failure relegates credit unions to 'more of the same'.
8.8 Collective action by trade associations is extremely important. Trade bodies should be involved in providing centralised services to member credit unions - as in the technology based product provision initiative by ABCUL. The SLCU, with only 30 members, has much less scope for significant initiatives, although they are preparing to provide an accountancy service for member credit unions and an in-house loan insurance scheme. Initiatives driven by the trade bodies are important in the development process. An example of an initiative which could help transform credit unions would be the establishment of a centralised finance facility where surplus funds of individual credit unions are invested centrally and where credit unions in deficit could access loans. This type of initiative adds real value. The jury is still out on whether the trade bodies have the scale, expertise and drive to radically change the operating environment for member credit unions. We feel the probability of success would be greater if there was one association. Failing that, cooperation between the trade bodies is of utmost importance.
8.9 A significant factor in the success of the credit union movement in for example the Balkan states has been the 'buddy system' operated by the credit union movements in the US and Canada. These mature credit union movements have provided financial assistance but also, and more crucially, they have replicated aspects of their own operational systems and provided expertise in the implementation of these systems. Scotland has always enjoyed strong links with both Canada and the US. The adoption of a 'buddy system' for Scottish credit unions could well be beneficial. Close attention to the experience of credit unions in Balkan states is warranted.
8.9 Our final thought is perhaps somewhat less constructive. Credit unions have been successful where there has been significant need and perhaps limited competition from other financial forms. This point is demonstrated by the expansion of the credit union movement in the Balkan States and certain Eastern European countries during the 1990s. Despite rebranding and significant financial support from Government credit union growth in GB has been pedestrian in comparison. For example the total asset base of all credit unions in Scotland, where the GB movement is strongest, amounts to only £0.22bn. (To provide some context for this number the Dunfermline building society has assets of £3.3 billion). Perhaps there is no real appetite for credit unions in GB. Given that banks and building societies already have in place networks and operational systems would a Community Reinvestment Act, such as that in the US, be more effective as a solution to the provision of affordable financial services for all. 10